Cap-Ex, Employment To Show Robust Growth

Chief financial officers of U.S. companies predict higher levels of capital spending and employment growth than they have for more than three years, according to the March quarterly CFO Outlook Survey, conducted by Financial Executives International (FEI) and Duke University's Fuqua School of Business.

An increase in capital spending is expected at 69% of companies over the next 12 months, with an average increase of 11%; more than double the five-percent increase expected last quarter. This quarter's cap-ex forecast is dramatically higher than predictions of just 18 months when companies anticipated contracted spending.

Tech spending is expected to increase four percent at 75% of the surveyed firms.

Employment Growth

In another positive trend, CFOs predict strong employment growth. Nearly three-fourths of surveyed companies plan to increase the number of employees in the coming year, while only 7% expect to reduce employment.

Overall, the number of employees should increase by a robust 5%. This is a significant improvement over expectations of the past three years when forecasts ranged from a decline to less than 2% growth.

"CFOs hold the corporate purse strings," noted Colleen Sayther, president and CEO of FEI. "Most have been managing in an environment where spending at a 'normal' rate was not the norm, and spending 'ambitiously' was virtually non-existent. Their predictions this quarter about an improvement in capital expenditures is very good news for the economy, and combined with their predictions about employment levels, very good news for the nation's workforce."

Offshore Component

One-quarter of companies in the March survey say their firms outsource to offshore locations. Averaged across all companies, including those that do not offshore any employment, 8% of total employment is located outside the United States. Among the companies that do already offshore, 18% of their workforce is non-U.S. workers.Going forward, 27% of all companies in the survey expect to increase the amount of work sent offshore. Among companies that already employ offshore, 61% expect to increase offshore employment, while only 4% expect to decrease the number of offshore employees.

CFOs report their companies are satisfied with the quality of work being performed offshore. Over half, 53%, say the work quality is above average or excellent, and another 40% say it is at least average. Offshore employment is most notable among manufacturing firms and among firms that have at least half of their sales in foreign markets.

The primary reason jobs are sent overseas is to reduce wages (73%), followed by reduced health care costs (31%), support of overseas operations (27%), and expansion of hours of service (17%).

The jobs being sent overseas are generally low- to moderate-skill. The tasks sent overseas vary and include manufacturing jobs, tech support, programming, engineering, back-office administration, and call and data center functions.

"The trend of increased offshore employment is worrisome from a long-run domestic employment perspective," said John Graham, professor of Finance at Duke University and the survey's director. "However ... [a]ll indicators point towards a return to a stable, long-run growth trajectory for the U.S. economy and corporate America."

Other Survey Highlights

The following are CFO predictions:

Earnings growth: expected to average a robust 30.6% during the
next 12 months (median growth of 15%). Earnings increases are
expected to average more than 30 % for smaller firms (sales of
less than $1 billion), and about 20 % for larger firms (sales of
at least $1 billion).

Sales revenue: expected to increase by 10% in the next year,
with large firms expecting an increase in revenues of about 7%,
and smaller firms expecting an increase of about 15%.

Health care costs: expected to increase 10.2%.

Price inflation: prices of products are expected to rise 2.8%,
the highest level of "pricing power" expressed in at least two years.

Wages: expected to increase by an average of 3.5%.

Mergers and acquisitions: 16% increase in activity expected.

Economic optimism: continues at near-record levels with a mean score of
67.5 (on a scale of 0 to 100). This compares to 55.4 reported one year
ago but down slightly from the score of 71 reported during the fourth
quarter of 2003.

Company optimism: on the rise, with a mean score of 73.6, an all time
high. This compares to the company optimism score of 62.7 reported one
year ago and of 71.5 reported last quarter.

GDP prediction: 3.2% growth, down slightly from last quarter's
3.6%.

U.S. Dollar: to appreciate relative to the euro. By the end of the
year the dollar is expected to appreciate seven percent and reach an
exchange rate of 0.86 dollars to 1.0 euros.

About the Survey

The CFO Outlook Survey, conducted by FEI and Duke, interviewed 216 CFOs of U.S. companies electronically in the third week of March. CFOs from both public and private companies and from a broad range of industries, geographic areas and revenues are represented. FEI and Fuqua have conducted surveys gauging the country's economic outlook from the perspective of corporate CFOs for the past seven years.